A recent study by the McKinsey Global Institute (MGI) is predicting a shortfall of as much as $31 trillion in household financial wealth and $19 trillion of that will be lost in the US alone.
The shortfall will be the result of aging populations among the world’s richest countries – the US, Japan, Germany, Italy – as well as declining birthrates and savings rates.
As households grow older they save less using their savings for the business of living and in many cases getting by, rather than for investments. This decline in household savings is exacerbated by “relatively lower savings rates of younger generations during their peak earning years”.
Young people tend to save less during the “prime earning years” which, for the average worker, are roughly from age 30 to 50″.
The authors – Diana Farrell, Tim Shavers and Sacha Ghai – note that “most public discussion on aging populations focus on rapidly escalating costs of pensions and health care.”
“Little attention has been paid to the potentially far more damaging effect that this demographic phenomenon will have on savings, wealth and economic well being,” the authors wrote.
Even in the US, from which the bulk of Bahamian economic activity is derived, with its younger population, its higher birth rates and steady influx of immigrants will, according to the MGI study, “experience the largest shortfall in household financial wealth in absolute terms”.
By 2024, US household financial wealth will drop by $19 trillion. The MGI study notes that US financial household wealth will decline to 1.6 percent from 3.8 percent.
Economists remain divided on the impact of declining global wealth – increase in global interest rates and capital versus “changes in asset prices and demand”.
The authors note that whatever the outcome one thing is certain: “as household savings rates decline and the pool of available capital dwindles, persistent government budget deficits will likely push interest rates higher and crowd out private investment.”
“This slowdown in household savings will have major implications for all countries,” they concluded.
For The Bahamas, any significant decline in US household wealth affects both tourism and financial services directly.
With a projected $19 trillion decline US household wealth, visitor arrivals could well be closer to those of the 70s and 80s than the halcyon days of four and five million. Reduced tourism revenue will result in a decline in government services.
The financial services sector will necessarily contract because there will be fewer clients to be served even though they may have more money.
In light of these predictions, the current development thinking of anchoring each island with a major development, usually a resort, appears destined to fail within two decades.
By C. E. Huggins, Nassau Guardian Senior Writer
